Drivers and Constraints of Ethical Tradein the Personal Care Sector

Sally Smith

October 2009

Acknowledgements

The author wishes to thank all companies and individuals that participated in the study, particularly the two retailers and six suppliers that so generously shared their knowledge and experiences. The study built on the work of the ETI Impact Assessment which involved a large number of additional companies, organisations and individuals whose contribution is also acknowledged. The research was devised in conjunction with Dr Stephanie Barrientos, now at the University of Manchester, who coordinated the ETI Impact Assessment and gave valuable input throughout the study. Funding for the study was provided by the Body Shop Foundation, the charitable arm of The Body Shop International plc.; we are grateful for their support.

The views expressed in this report are those of the author alone and do not necessarily reflect the views of any of the contributors mentioned above.

Sally Smith

Institute of Development Studies

University of Sussex

Brighton BN1 9RE

UK

Contents

1. Introduction

1.1 Aims and objectives of the study

1.2 Size and structure of the UK personal care sector

1.3 Methodology

1.4 Limitations

1.5 Structure of the report

2. Value Chain Structure and Relationships

2.1 Drivers and constraints of ethical trade

2.2 Value chain structure

2.3 Value chain relationships

2.4 Implications for ethical trade in the personal care sector

3. Purchasing Practices

3.1 Drivers and constraints of ethical trade

3.2 Prices

3.3 NPD, lead times and critical path management

3.4 Contractual arrangements

3.5 Implications for ethical trade in the personal care sector

4. Implementation of Ethical Trade policies

4.1 Drivers and constraints of ethical trade

4.2 Communication and learning

4.3 Monitoring

4.4 Capacity Building

4.5 Integration with Core Business

4.6 Implications for ethical trade in the personal care sector

5. Conclusions

Appendix: Resources

1. Introduction

1.1 Aims and objectives of the study

The aim of the study was to identify drivers and constraints of ethical trade in the personal care sector. ‘Ethical trade’ refers to the responsibility that retailers and brand name companies have for ensuring decent working conditions in their global value chains. This includes ensuring workers receive a living wage for a standard working week, are not subject to discrimination or forced to work and are free to join independent worker organisations of their choice. Ethical trade is operationalised through buying companies requiring suppliers to comply with ‘codes of labour practice’based on internationally recognised rights for workers as set out in Conventions of the United Nations and International Labour Organisation. Pressure from civil society organisations to address poor working conditions in global value chains has led many companies to adopt these codes. Prevalent in the apparel and food sectors, codes of labour practice are only now beginning to take hold in the personal care sector.

In the UK many brands and retailers are members of the Ethical Trading Initiative (ETI), analliance of companies, trade unions and non-governmental organisations (NGOs) that are working collectively to identify and promote good practice in the implementation of codes of labour practice. The Institute of Development Studies (IDS)carried out an impact assessment for the ETI to establish whether the implementation of codes by member companies hadbrought improvements in working conditions, and how impacts could be improved. The impact assessment identified a number of factors that can act as drivers or constraints of progress, including:

  • The structure and nature of value chain relationships from buyers through first tier suppliers to lower tier producers;
  • The purchasing practices used by buying companies for sourcing goods (e.g. contractual arrangements, pricing and ordering systems);
  • The management systems used for the implementation of codes of labour practice.

It was concluded that more attention needed to be paid to these factors in efforts to ensure good labour practices in global value chains.[1]

The ETI study was focused principally on the food and apparel sectors. The current study builds on the findings of the ETI impact assessment to examine potential drivers and constraints of ethical trade in the personal care sector. The short term objective was to increase the understanding of companies in the UKpersonal care sector of factors which facilitate or impede compliance with codes of labour practice, and to identify good practices that could help buyers and suppliers meet ethical trade requirements more effectively. The longer term goal is to encourage practices that (a) ensure workers in global value chains have access to their rights as set out in internationally recognised standards, and (b) promote well being for workers employed in the personal care sector.

1.2 Size and structure of the UKpersonal care sector

The UK personal caresector (also known as the ‘health and beauty’ sector) was worth £15.6 billion in 2007. This was an increase of 4.7% on the previous yearmaking it the fastest growing retail sector.[2] Retailers operating in the UK personal care sector can broadly be categorised as follows:

  • Specialist and niche retailers (e.g. Boots, Body Shop, Molton Brown)
  • Supermarkets (e.g. Tesco, Morrisons)
  • High street chains and department stores (e.g. Debenhams, Next)
  • Discounters (e.g. Savers, Wilkinsons)
  • Mail order/catalogues (e.g. Littlewoods, Argos)
  • Television shopping channels (e.g. QVC, Ideal World)
  • Independent retailers and convenience stores

Supermarketshave captured an increasing share of retail, accounting for around 45% of consumer spending on health and beauty overalland more in categories such as Toiletries.[3] Four of the top five retailers are now supermarkets, although the specialist retailer Boots is still the market leader.

Most major retailers sell both private label (own brand) and independently branded products. The majority ofindependent brands are owned by multinational companies such as Unilever (e.g. Dove, Vaseline, Sunsilk), Proctor and Gamble (e.g. Olay, Max Factor, Sure) and L’Oréal (e.g. Lancôme, Garnier, Redken). There are also a large number of less widely recognised health and beauty brands which tend to be retailed through distribution channels like mail order catalogues and television shopping channels, but which also have some presence in major retail outlets. Some of these are developed specifically for particular retailers but, contrary to private label products, ownership of the brand remains with the supplier.

1.3 Methodology

This was a qualitative study with limited resources which had the specific aim of building on the findings of the ETI Impact Assessment to explore potential drivers and constraints of ethical trade in the UKpersonal care sector. IDS worked collaboratively with two retailers with a presence in the sector, to facilitate access to suppliers and an understanding of supply chain practices. Each retailer provided full details of their supply base and IDS selected a shortlist of first tier suppliers to include in the study based on the following criteria:

  • Type of product (e.g. toiletries, cosmetics, healthcare, gifts/accessories);
  • Type of supplier (proportion of own production vs. out-sourced production);
  • Duration of business relationship;
  • Proportion of supplier’s output taken by retailer;
  • Location (due to resource constraints, only UK suppliers were included).

The shortlists were signed off by the retailers, excluding suppliers they felt were not appropriate to ask to participate (e.g. because they were engaged in an intensive process of product development or it was likely the supply relationship would be terminated in the near future). The retailers then contacted all short-listed suppliers to inform them that IDS may approach them to ask for their participation, but IDS did not inform the retailers which suppliers were included in the final sample. The aim was to provide suppliers with anonymity to encourage them to speak freely about their experiences, without fear that it may impact on their commercial relationships. To the same end no companies (including retailers) involved in the study are named in this report.[4]

The study investigatedvaluechain structure, purchasing practices and implementation of ethical trade throughout the selected chains, from retailer through first tier suppliers and manufacturers to primary producers. In-depth interviews were first carried out with the two retailers, including sectionmanagers, ethical trade staff, buyers and technologists. Interviews were then carried out with a range of staff at each supply site, including managing directors and commercial, operations, quality assurance and human resource directors/managers, as well as representatives from relevant employee bodies (e.g. trade unions, works councils). Interviews were also carried out with a small number of key informants with relevant expertise (e.g. from the ETI and NGOs) in order to place the study in the broader context of developments within ethical trade.

1.4 Limitations

As stated above, this was a small qualitative study which did not attempt to draw on a representative sample of the entire personal care sector. Only six suppliers were included in the sample, all of them based in the UK. As such, only tentative conclusions can be drawn regarding ethical trade in the personal care sector more generally and the recommendations should be read in that light.

One of the retailers that participated in the study can be categorised as a specialist retailer, the other a high street chain. Both retailers only sold private label personal care products. The original objective was to include at least one multinational in the study, in order to try and establish potential differencesin value chain dynamics and the implementation of ethical trade for independently branded versus private label products. This was not achievedfor a number of reasons:

  • We were unable to find an appropriate contact within some companies;
  • Some companies did not respond to our attempts to make contact;
  • Some companies agreed to participate but only did so after considerable delay, by which stage the study was already under way;
  • Some companies declined to participate.

Fortunately, the suppliers included in the studyserviced a broad range of buying companies, including various categories of retailers (e.g. discount retailers, mail order, television channels etc.), as well as independent brands. This included some coverage of multinationals that outsource at least a proportion of manufacturing, as well as smaller suppliers that have developed their own brands. This made it possible to draw out some potential differences between the various retail and brand categories from the perspective of suppliers, although further research isrequired in order to verify the findings.

The difficulty experienced finding companies to participate had implications in terms of scale, scope and delivery of the study, but should be considered a finding in itself – it is an indication of the relative immaturity of ethical trade in the personal care sector compared to other sectors. Many companies are only just starting to implement codes of labour practice in their personal care supply base. As such, many are wary of participating in research studies which they feel may expose them to risk, and they have yet to engage in a forum through which practitioners in the sector can share experiences and work collaboratively.

Finally, it should be noted that the field research for this study was carried out in 2007 and early 2008, and as such the findings do not fully reflect impacts resulting from the recent economic downturn.

1.5 Structure of the report

The report isorganised as follows. Section 2 presents the findings related to the structure and nature of value chains, Section 3 focuses on purchasing practices, and Section 4 looks at the implementation of ethical trade policies by buying companies. In each of these sections the potential for practices in the UK personal care sector to act as drivers and constraints of ethical trade are drawn out. Section 5 summarises the findings and draws out some conclusions for the sector as a whole.

2. Value Chain Structure and Relationships

2.1 Drivers and constraints of ethical trade

Previous research has demonstrated that the structure of buying companies’ global value chains and the relationships between actors in those chains can be drivers or constraints of improvements in working conditions at supply sites (Acona 2005, Barrientos and Smith 2006, Oxfam 2004, SUDWIND Institute for Economy and Ecumenism 2007). In general, buying companies and first tier suppliers have a greater chance of influencing labour practices in shorter, more direct chains where relationships are close and ongoing. In longer, more complex value chains where relationships are indirect or less stable, their leverage is limited and labour practices are more likely to be determined by the attitudes of individual suppliers or other actors (e.g. agents) in the chain, as well as other factors beyond buyers’ control. Having said that, where several buying companies source from the same supplier and make similar demands regarding labour practices, there can be a collective effect and there is greater potential for change (Barrientos and Smith 2006). The probability of poor labour practices also varies by country, with risks generally greater in less developed economies, although there are exceptions to this and no country is considered risk-free. In this section we look at the types of value chains that exist currently, and trends towards the future, in the UKpersonal care sector.

2.2 Value chain structure

One of the retailers directly involved in the study had 86 active first tier suppliers,representing 113 factories,in January 2007. The other had 19first tier suppliers in January 2008, representing approximately 80 factories. For both retailers the majority of factories were located in the UK and China, although there were 16 additional countries represented, including various transition and developing economies (e.g. Hungary, Poland, India, Korea and the Philippines).[5] Both retailers had a core of key suppliers with whom they placed a lot of business and could represent 25-50% of those suppliers’ businesses. According to one of the retailers involved in the study, it is a specific strategy they use in order to ensure good service delivery from key suppliers. For other suppliers they were less important as customers, often placing less than £100,000 of business annually.

This type of ‘core plus periphery’ supply base for private label products appears to be relatively common among retailers. Three suppliers had one main customer that they had been dealing with for a long time and accounted for 40-50% of their business, plus a varying number of additional customers. Two suppliers had 80% to 95% of their business spread between 6 to 8 customers. The sixth supplier had a wider customer base, including outside the UK, although one UK retailer stood out as their biggest customer.

Between them the 6 suppliers serviced over 40 retailers and independent brands, including:

  • Specialist/niche retailers (Boots, Superdrug, Body Shop, Sally Hair and Beauty)
  • Supermarkets (Tesco, J Sainsbury, Asda)
  • High street chains and department stores (Marks and Spencer, Next, John Lewis)
  • Discounters (Savers, Wilkinsons)
  • Mail order/catalogues (Littlewoods, Argos)
  • Television shopping channels (QVC, Ideal World)
  • Brands (John Frieda, PZ Cussons, Avon, Estee Lauder)

There was a fair amount of overlap in the UK supply base of the two retailers, with four of the six suppliers in the study sample supplying both companies. Various interviewees referred to the UK personal care sector as a “small world” where “everyone knows everyone”, suggesting the potential for collective impact in relation to ethical trade.

As in other sectors, there is a general trend toward increased sourcing of personal care products from Asia. However, interviews with retailers and suppliers indicated that there are several reasons why personal care goods will continue to be sourced through UK/European suppliers for some time:

  • They are currently more able to meet strict European legislation surrounding product safety and the need for extensive product testing of health and beauty products like skincare goods and cosmetics (e.g. testing for stability, toxins, etc as well as against product claims);
  • ‘Wet’ products like toiletries are often largely water-based, presenting safety problems in many developing countries and making them less cost effective to ship long distances;
  • Some personal care goods can be made in highly automated factories, reducing labour costs and making UK factories more competitive;
  • New Product Development (NPD) is still markedly stronger in Europe and the US compared to Asia and manufacturers in the UK and Europe are more able to produce complicated products;
  • There is continued demand for short-run, low-volume goods, which UK/European manufacturers are better positioned to supply;
  • Some retailers are responding to consumer interest in products which are ‘Made in Britain’.

As such, Asian manufacturersare typically being used as contract manufacturers once products have been developed in Europe (especially for simple, flow items with a low water base), or for sourcing components, rather than as Full Service Vendors. The exception to this was Gift and Accessories items which have been sourced predominantly from Asia for several years, largely because they are more labour intensive and less complex to produce. One UKsupplier in the study still manufactured all products itself, using components sourced principally in the UK. Four others continued to manufacture, assemble and/or pack off in the UK (including two which supplied only accessories), but outsourced part or all manufacture to third parties, especially in China. Only one supplier had ceased manufacturing/packing in the UK altogether.